Investing in the oil and gas sector hasnt been fun these past few months. Unless you’re invested in a select few, your risk has not been rewarded at all by Mr. Market.
I can post a very long list of junior/intermediate producers that got decimated over the months. The senior producers pretty much sum up what has been going on so far this year, notice the YTD returns (only 2 stocks out of 12 returned positive returns so far this year):
This disinterest in oil and gas equities has wreaked havoc on investor portfolios especially when one take-down is followed by another as in PRY and RPL. Retail investors become so disgusted they end up puking their shares at severe losses contributing to the decline in share price.
Many indebted companies are operating in a difficult environment leaving non asset sales as the only recourse to raising cash. Even that is no longer guaranteed given a buyer’s market is currently prevalent in the WCSB.
What a grim picture, a reminder of 2008 and 2009 levels for some stocks. Yet, a quick look reveals oil differentials have narrowed significantly. At $17 per barrel to WTI, WCS discounts are a long way from the $40 seen just a few months back. Edmonton Par is trading at a $3 or $4 discount to WTI and natural gas has wind in its sails as AECO trades above $3.50 per mcf.
The picture has certainly gotten better in terms of differentials! It’s most probably the result of increasing oil by rail shipments. More than 150k bopd are currently leaving Canada by rail according to Baytex Energy ‘ (BTE always has great tidbits on heavy oil, check out April’s presentation page 48)
While rail is no substitute for pipelines, it’s here to stay until sufficient pipeline capacity is available. The green boys who are worried about transportation risks should push hard for Keystone XL or face an ever increasing number of train loads out of Canada and North Dakota.
Speaking of KeyStone XL, I believe this could provide the oil and gas sector a positive boost in sentiment, at this stage it is urgently needed! Not only did we miss a seasonal??strength??in our sector this year, we are already heading into the summer doldrums.
Except at this point, is the selling driven by the sell in May and go away or a genuine fear of oil prices dropping down below $80 per barrel? I guess its a mix of both especially after the broad sell off we saw last week.
We know the global economy is fragile but we are still in growth mode where it counts ‘ India and China. Oil demand is still expected to grow to 105 million barrels per by 2030.??This requires coming up with more than 15 million barrels of oil per day excluding natural declines.
Don’t get me wrong, oil can easily revisit $35 per barrel if we go through another recession. But in this environment of ‘growth’, I think the downside is limited. There’s a lot of oil to go around but not all of it is cheap. Case in point is a very interesting article posted on Rigzone:
‘The United Arab Emirates is planning to get up to 25% of its power from nuclear energy by 2021 as it looks to reduce its domestic reliance on fossil fuels and ensure it has enough oil to export as its economy expands, the countrys new energy minister said Monday.
Mr. Mazrouei said the days of easy, cheap oil are gone and finding new discoveries is becoming difficult and costly, while global oil demand will increase by one million barrels per day until it reaches 105 million barrels per by 2030.’
Straight from the horse’s mouth, a country producing 3MMbpd of oil in the Gulf.
Of course, right now nobody cares; the oil and gas market will remain ignored and abused until sentiment changes.
We recently witnessed a natural gas rally which took NYMEX NG above $4 per mcf. I don’t buy it but I’m still exposed to it through different holdings if the rally continues. Other investors firmly believe in the bullish case given storage is now ~75 BCF below the 5 year average.
I’d rather stick to a few opportunities a la NFK/DXE until further notice. NFK has been a profitable trade having sold at $0.17.
From $0.095 to $0.17 that’s a +79% profit that I??couldnt??resist locking. If the price moves again towards $0.10 I’ll step back in. Besides that, I’m happy buying a utility ETF ZUT.TO 15.87 [+0.05] with the profits, there’s no point in playing the hero, I prefer to wait until sentiment changes and it will sooner or later. The world is not ending??any-time??soon and oil above $80 is still very profitable to Canadian companies The market will remember that once the pipeline issues are no longer a worry.
Whats your take on the current market’